OpenTable’s rise and fall is a cautionary tale

FORTUNE — Nothing lasts forever, but the speculative momentum that can drive up tech stocks is especially fleeting. Just ask OpenTable OPEN.

The company that made online restaurant reservations a thriving business went public in May 2009 at $20 a share, in the depths of the worst U.S. recession in decades. But investors welcomed the stock and its promise of profit growth, and the stock rose modestly for the next several months.

For a couple of years, OpenTable delivered on that promise, beating the Street’s earnings estimates by a wide margin quarter after quarter. OpenTable went from being an IPO that proved Internet stock offerings could thrive in a bear market to being a favorite of momentum investors – until the stock hit $118 in April. Along the way, it whetted investor appetite for other web IPOs like Pandora P, LinkedIn LNKD and Zynga ZNGA.

In the past eight months, however, the stock has plunged, giving up 67% of its value. OpenTable trades around $39 a share. Its market cap has fallen to $930 million, not far from its $700 million market cap when it went public.

Usually, when a stock loses two-thirds of its value in a matter of months, it’s a sign of crisis – a scandal, an incompetent management or some serious reversal of fortune. But none of these apply to OpenTable. The company is expected to see revenue grow 40% this year and earnings rise to $1.20 a share from 2010’s 87 cents. OpenTable is still a growth company with a 17% operating margin.

So why has the stock crashed? There are two basic reasons that, taken together, offer a cautionary tale for investors eager to jump into the IPOs of hot web 2.0 enteprises like Zynga, Groupon GRPN and Facebook.

The first reason has to do with that herd mentality of momentum investors. It can turn on a dime, and the logic used to justify a stock’s irrational rise can become just as irrational when the stock is sinking. OpenTable’s value was simply without justification back in April, when its forward PE was above 100.

Today, OpenTable trades at 34 times its estimated 2011 earnings, or more than twice as high as the S&P 500. Growth stocks often have a higher valuation than the market average, but analysts are expecting OpenTable’s revenue growth rate to slow to 22% for 2012. That’s about the same as Google’s GOOG projected growth rate, and Google is trading at around 17 times its estimated earnings.

And that brings us to the second reason for OpenTable’s decline: The company’s business is beginning to face some headwinds. While profits are likely to keep growing for a while, the growth will come at a much slower rate. But OpenTable’s core markets like San Francisco are becoming saturated while the company faces rising competition in newer markets abroad.

In fact, overseas competitors are making headway in OpenTable’s home turf. Eveve, a Europe-based online-reservation company, said recently that 30,000 restaurant bookings in the Twin Cities switched from OpenTable to its service in a four-month period. Livebookings, another European rival expanding into the U.S., offers restaurants a free reservation service, along with premium features such as email marketing and analytics.

OpenTable has 24,000 restaurants using its reservation system, compared to Livebooking’s 9,000. But the lower-priced competition could force the company to cut its fees, which could pinch profit margins. The company’s operating margin is already facing pressure, declining to 16.9% in the last quarter from 18.6% in the same quarter a year earlier.

OpenTable is facing these new challenges without the help of its respected CEO Jeff Jordan. When the company announced in May that Jordan, a veteran of eBay EBAY and PayPal, left to become a venture capitalist at Andreessen Horowitz, OpenTable’s stock fell 15%, beginning its eight-month slide. The stock fell 4% on Dec. 20 when Jordan left the company’s board.

Under its new CEO – Matthew Roberts, who previously served as CFO for six years – OpenTable’s image has gone from a sure-fire stock to a company in disarray. But neither view is accurate. OpenTable is still a well-run company in a growing market, albeit one that is facing the tougher competition that reaches most thriving markets given enough time.

Some OpenTable bears have pointed to a decline in the number of seated diners in the third quarter (23.6 million) from the number in the second quarter (23.8 million). But this argument is misleading: The number of seated diners in the third quarter has been flat or down from the second quarter for the past four years. It’s a seasonally slow quarter. For the first nine months of 2011, seated diners are up 51% to 70 million.

Given that downward momentum – along with a PE that’s still relatively rich and the threat of competition – OpenTable will likely remain volatile. But its rise and fall offers a warning to anyone too eager for a piece of a hot IPO like Facebook: It doesn’t take a stock bubble on the scale of the 90s dot-com mania for investors to lose money on a supposedly hot Internet stock.